Froth fades in Smallcaps, but outsized returns still unlikely, says S Naren

Smallcaps still demand patience and discipline, says S Naren

With the Nifty Smallcap index down over 7 percent in the past three months, investors are reassessing whether the segment is attractive enough at current levels to deliver meaningful returns going ahead. While the recent correction has eased excesses in the space, it has not created a classic bargain opportunity yet, said S Naren, executive director at ICICI Prudential AMC, in an exclusive conversation.

Naren’s comments come at a time when the fund house has recently reopened subscriptions to its smallcap fund.

“There are opportunities for returns. There are no opportunities for outsized returns,” Naren said.

According to him, the key shift since last year has been the dissipation of froth rather than the emergence of deep value.

“The fact is that there was froth in 2024. The level of froth in small cap has possibly come down significantly. So we said that even if we reopen, there is not going to be any situation where we are going to struggle with the amount of money that we are getting. But I don't think we are in a period where there is scope for outsized returns or something like that,” he said.

Naren stressed that smallcaps should still be approached with caution and only as part of a broader asset allocation strategy. “Within an asset allocation framework, can you consider a small investment in small cap? Yes, you can,” he said.

He also believes the experience for investors starting systematic investment plans (SIPs) today is likely to be materially different from those who entered when valuations were stretched. “You start an SIP now and invest for the next five, six, seven years. Maybe you will have a better experience,” Naren said.

He contrasted this with the previous cycle, when SIP inflows were deployed at elevated valuations. “Two years back, when you are in stratospheric valuation of small cap, you are actually, those SIP investments get invested at high levels,” he said. “Whereas now from now, froth is gone. So next five years you do SIP investing, you are in a better shape than what you were before.”

The takeaway is clear: while smallcaps today may offer more reasonable entry points than a year ago, they demand patience, discipline and far more modest expectations than during the peak of the frenzy.